Sweden on the Populist Precipice? Not So Fast

(Bloomberg Opinion) -- Sweden, the last Scandinavian country to withstand the tide of populism that's swept across Europe, is on the brink.

There's been concern over the prospect that the Sweden Democrats will stage a breakthrough in this weekend’s election – but much of the worry has been for the wrong reasons.

In the short term, don't expect the result of the vote to change the Swedish model much. It won't trigger an upheaval in the stock market or a widening of bond spreads. But in the long term, a political stalemate risks deepening the country's next economic crisis. That suggests monetary policy will have to be looser and explains why the krona has weakened in recent months.

Politically, the differences between the parties are now smaller than ever in reality, if not in perception. Since entering parliament in 2010, the Sweden Democrats have moved in a more pragmatic direction – just as the Conservatives and Social Democrats moved to tighten up immigration controls in the wake of the Syrian refugee crisis.

Other Nordic countries like Finland and Norway have had sizable, right-wing populist parties in parliament for a long time. Yet they remain open, welfare states with a strong track record of growth. There is no reason to buy into the nightmare scenarios that are being floated around.

Economic policy is unlikely to change in the short term. The Riksbank will remain a strong and independent central bank. The budget will still be set within one of the tightest processes in the European Union.

But the longer term is a different story, and investors may not be concerned enough about it. The rise of the Sweden Democrats shows the cracks in the Nordic model are widening.

Strict employment regulations, strong unions and generous welfare benefits have created barriers for immigrants wanting to enter the labor market. The economy has few jobs that don’t require qualifications. The influx of refugees has also placed a greater burden on schools, primary care facilities and other public institutions.

The political gridlock the Sweden Democrats threaten to inflict means the country's institutions will struggle to address these issues as well as the growing structural imbalances that threaten the economy – in particular those in the housing market.

Households are heavily indebted, the property market is dysfunctional, with onerous planning and construction rules and strict rent controls limiting supply. Home prices have increased fast over the last 20 years.

Fixing this will require property to be more heavily taxed – relief on mortgage interest repayments will have to be phased out. Greenbelt rules and restrictions designed to protect the skyline from high-rise construction must be lifted and rent controls phased out in the metropolitan areas.

And what about the next big economic downturn? The likelihood of Sweden experiencing a deep contraction and slow recovery has only got greater: a weak minority government, struggling to survive in a fractured parliament, will be unable to respond to these and other challenges effectively.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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